REPORT UP IN SMOKE HOW THE EU’S FALTERING CLIMATE POLICY IS UNDERMINING THE CITY OF LONDON Will Straw and Reg Platt with Jimmy Aldridge and Esther Cowdery November 2013 © IPPR 2013 Institute for Public Policy Research ABOUT THE AUTHORS Will Straw is associate director for climate change, energy and transport at IPPR. Reg Platt is a senior research fellow at IPPR. Jimmy Aldridge is a research intern at IPPR. Esther Cowdrey is an economic consultant and a finance lecturer in Lyon, France. She is the founder of Carbon- Politics, an economic thinktank devoted to researching how financial markets can best serve the environment. ACKNOWLEDGMENTS The authors would like to thank John Ashton, Graeme Cooke, Richard Folland, Liz Gallagher, Michael Jacobs and Neil Morisetti for their insightful comments on an earlier draft. A number of colleagues at the Department for Energy and Climate Change and Foreign and Commonwealth Office have provided expert advice and guidance throughout the project. We are grateful to them all. All the views contained in the report, of course, remain the authors alone. The following people attended a roundtable discussion at the City of London Corporation on 3 September 2013: Andrew Ager, Richard Folland, Fan Gao, Richard Gledhill, Anthony Hobley, Jonathan Grant, Tom Jackson, Neil Johnson, Abyd Karmali, Simon Kennedy, Niall Mackenzie, Neil Morisetti, David Peniket and Ingo Ramming. Thanks to all of them for their contribution which formed the basis of the discussion in Chapter 4. In addition, we owe a debt of gratitude to a number of other people with whom we spoke over the course of the research. This includes Miles Austin, Phil Brown, Rob Elsworth, Sam Johnson-Hill, Mark Lewis, Damien Morris and Raphael Trotignon. Thanks finally to Adam Maddock and Simon Mills at the City of London Corporation who made this research possible, hosted the roundtable discussion mentioned above, and provided expert advice throughout the course of the project. ABOUT IPPR IPPR, the Institute for Public Policy Research, is the UK’s leading progressive thinktank. We are an independent charitable organisation with more than 40 staff members, paid interns and visiting fellows. Our main office is in London, with IPPR North, IPPR’s dedicated thinktank for the North of England, operating out of offices in Newcastle and Manchester. The purpose of our work is to assist all those who want to create a society where every citizen lives a decent and fulfilled life, in reciprocal relationships with the people they care about. We believe that a society of this sort cannot be legislated for or guaranteed by the state. And it certainly won’t be achieved by markets alone. It requires people to act together and take responsibility for themselves and each other. IPPR 4th Floor 14 Buckingham Street London WC2N 6DF T: +44 (0)20 7470 6100 E: [email protected] www.ippr.org Registered charity no. 800065 This paper was first published in November 2013. © 2013 The contents and opinions in this paper are the author(s) only. POSITIVE IDEAS for CHANGE CONTENTS Executive summary ......................................................................................................2 1. Introduction ..............................................................................................................5 2. Europe is not alone: Action on climate change is now global .................................7 The imperative for international action on climate change .............................................7 EU leadership on climate change ................................................................................8 Action in China and the US and the prospects for a global deal .................................10 Bottom-up action: clean technology and carbon pricing ............................................12 Conclusion ...............................................................................................................15 3. A patient worth saving: The EU Emissions Trading Scheme ................................17 Pioneering carbon trading .........................................................................................17 Achievements of the EU scheme ...............................................................................18 Problems with the EU scheme ..................................................................................20 Conclusion ...............................................................................................................23 4. Losing our advantage: The City of London in decline ...........................................24 5. Back on track? Reforms to maintain EU momentum on climate change ..............28 Proposal 1: Agree an ambitious EU 2030 climate package .........................................28 Proposal 2: Structural reform ....................................................................................29 Proposal 3: Investigate the introduction of carbon border adjustments .......................31 References .................................................................................................................33 Appendix ....................................................................................................................37 1 IPPR | Up in smoke: How the EU’s faltering climate policy is undermining the City of London EXECUTIVE SUMMARY Climate change is real, manmade, and set to cause catastrophic consequences across the planet. The evidence from the International Panel on Climate Change, released earlier this autumn, is more compelling than ever before. If global emissions continue on their current trajectory, the ‘carbon budget’ estimated to avoid global temperatures increasing by more than 2°C will be exceeded in 15 to 25 years’ time. As a global problem, climate change can only be tackled globally. Yet, by its nature, the world’s largest-ever market failure is subject to severe coordination and sequencing problems. In this context, the European Union (EU) has a proud record of taking the lead in tackling climate change. It was the first major market to put in place binding targets to reduce its greenhouse gas emissions (by 20 per cent against its 1990 baseline by 2020). The EU Emissions Trading Scheme (ETS) was the world’s first market-based mechanism for reducing emissions, and aims to do so at the lowest cost. The EU’s ‘first mover’ strategy on climate action has recently come under fire. Critics argue that by going it alone the EU is engaged in an act of futility, since it is responsible for only 12 per cent of global emissions. They say that this effort is piling costs on business, hammering competitiveness, and driving economic activity overseas (a process known as ‘carbon leakage’). These critics have become louder in recent years as energy costs, and domestic debates about them, have increased. Despite this bluster, the EU is not alone. China (27 per cent of global emissions) and the US (17 per cent) are taking climate change seriously. Both are carrying out concerted actions to reduce emissions and to invest in low-carbon technologies. Carbon reduction is now firmly embedded in China’s domestic economic strategy. They are widely expected to announce a binding cap on emissions from 2016, amid growing public concerns about air pollution. US president Barack Obama used his second-term inauguration speech to make clear his personal commitment to tackling climate change. In the absence of federal legislation, cap- and-trade schemes now cover 11 states, including New York and California. Across the world, investments in clean technology are growing rapidly. Total investments increased five-fold from 2004 to 2013, reaching a peak of nearly $275 billion in 2011. China and the US are, by a significant margin, the leading investors. In 2013 alone, China aims to install a world-record 10GW of solar photovoltaic generation. In the US in 2012, 49 per cent of new electricity generating capacity came from renewables. More broadly, the global low-carbon and environmental business market is worth around €4 trillion a year, and is expected to grow at over 4 per cent per year to nearly €5 trillion by 2016. The EU has carved out a 22 per cent share of this market, worth over €900 billion a year, compared with a 19 per cent share for the US and 13 per cent for China. Meanwhile, carbon-pricing schemes – many based on the EU ETS – are proliferating across the world. Today, countries which have implemented or scheduled carbon-pricing mechanisms emit roughly 21 per cent of the world’s carbon dioxide. If China, Brazil, Chile and other emerging economies that are investigating the concept are included, this rises to 48 per cent of global emissions. The EU’s lead on international climate change has had a number of benefits. First, it has given the EU an important diplomatic role, which is far greater than the sum of its parts. Second, it has helped to pump-prime low-carbon growth, with many so-called ‘green’ sectors growing faster than other parts of the economy during the downturn. For example, a third of the UK’s growth in 2011/12 came from green business. Third, it is likely to prove 2 IPPR | Up in smoke: How the EU’s faltering climate policy is undermining the City of London cheaper than waiting until a later date. According to the International Energy Agency, delaying action until after 2020 could require an extra $5 trillion of global investments between 2020 and 2035 in order to meet the below-2°C target. Central to this leadership has been the creation of the EU ETS,